SAN FRANCISCO—The Moscone Center, responsible for bringing in multiple citywide conventions, will be closed for renovations starting this year through 2018.

For the San Francisco hotel market, that means a loss of compression nights, and consequently less power to drive rate. Still, hoteliers in the market are optimistic they can counter this loss of business until construction is complete.

Hotels won’t feel the impact of the renovation work until April, as there are no citywide conventions in the second quarter and only one in the third, said Chuck Pacioni, GM of the San Francisco Marriott Marquis.

“This would be the first time in the history of the city that the center has literally been closed for a significant amount of time,” he said. “There’s no historical reference point to go back and understand what’s going to happen. People feel occupancy will be fine, but rates will drop due to lack of compression.”

Driving demandOn average, San Francisco produces about 950,000 roomnights in a calendar year, according to John Reyes, EVP and chief sales officer for SF Travel. The Moscone Center is a compression engine, he said, and allows larger hotels to fill up while other hotels in the market take in guests who are not part of the citywide meetings demand.

According to estimates by SF Travel, 681,600 visitors are expected to attend Moscone Center events this year—a decrease of 211,724 attendees (24%) below the average number. The total number of visitors to San Francisco, including those attendees, is expected to remain flat at 25.9 million.

Occupancy for January 2017 reached 74.3%, a 2% year-over-year decrease, according to data from STR, HNN’s parent company. Even so, average daily rate increased 9.4% to $254, achieving a 7.2% increase in revenue per available room to $188.71.

Of citywide conventions, 70% are annual, Reyes said, and the remaining 30% is rotational business. The real impact of the convention center construction is that a number of the annual customers decided to take their events to other locations.

“The context here is, unlike other destinations, like San Diego, that are working hard to get different types of business into the convention center, here it’s about maintaining what you have,” he said.

2019, when the expansion is complete, will be one of the city’s largest production years for roomnights, hitting more than 1 million, Reyes said.

Buoying occupancyTo counter the loss of convention business, Reyes said, he and other hotels in the area have shifted their focus to backfilling with self-contained business. While that helps occupancy, it doesn’t make up for the loss of compression in the market, he said.

“It’s nice to backfill, but it doesn’t replace what the market could have done in those weeks (of citywide conventions),” he said.

SF Travel has worked closely with the hotel community through its council to address the impact of the expansion, Reyes said. The collective effort came up with a number of programs and initiatives to generate more in-house meetings to make up for the loss of citywide business, he said.

One such program has neighborhood hotels joining forces to sell as one hotel with combined meeting space, he said. They also have a joint promotion that says meeting planners can pick from a selection of amenities, such as complimentary Wi-Fi or a reception, to attract business.

General managers are making sales calls and meeting with potential customers to let them know about availability in 2017, he said. The belief is that such efforts are better received when it’s the GMs, rather than sales and marketing directors, making contact.

Pacioni said his property is participating in a couple of those efforts, but he doesn’t know how effective they will be. He believes his property will have more success through its self-contained strategy, as it has enough space to handle that. Some of the self-contained business could become annual customers, he said.

But if there’s a major citywide convention going on, his property will generally be involved in it, he said.

“We can book 10 to 15 years in advance,” he said. “Generally, when the city commits a group out that far in advance, we’ll generally commit inventory at the same time the group is confirming with the city.”

The main focus now is getting word out to customers about the availability, Pacioni said. Without the expansion work, 2017 and 2018 were shaping up to be extremely strong years for group business, he said.

“This is a manufactured two-year bump in the road,” he said. “I expect 2019 to be a really nice year for the city.”

Market overviewMike Bellisario, VP and equity research senior analyst at Robert W. Baird Company, said he has traveled to San Francisco a few times in the past three months, and toured properties as a way of determining if investor sentiment was too negative.

“My general sense is when the dust settles at the end of the year, 2017 won’t be as bad as some people thought,” he said.

Performance in the first quarter this year should pleasantly surprise people, he said, but the good feelings are likely to reverse after a weaker second quarter. Performance will decline for the next 12 to 18 months, he said, but it will get better after that.

“We know this is not a Houston issue,” he said. “There is light at the end of the tunnel. … It should be one of the top growth markets in the top 25 markets.”

It’s a rate issue, Bellisario said. The hotels in the city will pull in guests who would otherwise stay farther outside of the city, he said, helping occupancy but not the ability to drive rate. Hotels farther out and in nearby markets might lose out on guests who will stay inside the city now that hotels there have availability and lower rates.

“Hotels are fighting for more in-house group,” he said. “If they’re doing that, obviously they’re lowering rate or offering incentives. The pie is relatively fixed. It has to come from somewhere, from Fisherman’s Wharf? The airport?”

Over the long run, San Francisco has the possibility of pricing itself out compared to other cities, Bellisario said. It’s so expensive, people are not traveling there as much, he said, and someone looking to visit a West Coast location has several cheaper options. There’s a big difference, he said, between hotel rates at $500 a night in San Francisco and rates of $250 a night in San Diego for a four-day vacation. That’s a long-term risk for the city, he said.

“My worldly view is that corporations and consumers are much more price-sensitive today,” he said. “That’s why job growth is attractive to low-cost-of-living cities.”

The Moscone Center expansion creates a “nice little pause for the city,” he said, and it lets other markets catch up a little bit. However, more demand is expected after the work, he said, and rates could still go higher.

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